chapter 4 role of government & fiscal policy. arrow process why use graphics from...

PB202 MACROECONOMICS

CHAPTER 4ROLE OF GOVERNMENT & FISCAL

POLICY

Arrow ProcessWhy use graphics from PowerPointing.com?

GOVERNMENT EXPENDITURE

-Definition- Important functions

-Revenue (tax, non-tax & non-revenue receipt)-Borrowing (internal & external sources)

- Contractionary- Expansionary - Discretionary - Automatic

- Definition-Preparation- Types (Balanced, Surplus & Deficit)

- Operating- Development

SOURCE OF REVENUE & BORROWING

FISCAL POLICYBUDGETECONOMIC FUNCTIONS OF GOVERNMENT

Chapter Summary

This illustration is a part of ”Building Plan”. See the whole presentation at slideshop.com/value-chain

Prepared by: Azlina bt Azmi

Session of December 2010

Preview 1980 – 1982: Government implemented

expansionary fiscal policy to combat recession

Early stages of Asian Crisis: Government tightened the budget to reduce inflationary resulted from the depreciation of RM

1998: Fiscal policy turned expansionary to support economic activity

Economic Functions of Govt Plays an important role in order to achieve

economic stability by implementing economic policy

Create a business environment to encourage competition among producers

To control income disparity through taxation and transfer of payment

To promote private sector as the main engine of economic growth

Document contain a preliminary approval plan of public revenue and expenditure in a year

The Finance Minister will announce the National Budget in September or October in Parliament

What is Budget ?

Balanced Budget◦ Occurs when government’s total expenditure is

equal with total revenue

Surplus Budget◦ Total revenue > total expenditure

Deficit Budget◦ Total revenue < total expenditure

Types of Budget

Balanced, Surplus or Deficit

◦ Which one is good or bad?

Question

Surplus Budget

◦ Occurs when government implement during inflation

◦ Which is reduction in Government spending (total expenditure) & increase taxes (total revenue)

When?

Deficit budget

◦ Occurs when government implement during deflation (unemployment & recession)

◦ Increase in Government spending (total expenditure) and reduction in tax (total revenue)

When?

Is revenue received by government Is an important part of fiscal policy In Malaysia, the government revenues can

be various such as:◦ Tax revenues – Direct and Indirect Taxes◦ Non-tax revenues◦ Non-revenue receipt

Government Revenues

Direct taxes are collected by the Inland Revenue Board (IRB)◦ Income tax on individuals and corporation◦ Petroleum income tax◦ Stamp duty◦ Real property gains tax

Direct taxes

Indirect taxes are collected mainly by the Royal Customs and Excise Department ◦ Import duties◦ Export duties◦ Excise duties◦ Sales tax◦ Service tax

Indirect Taxes

Non-tax revenues or non-tax receipts are revenues not generated from tax

Revenues that accordance with law and act Include:

◦ Fees for issue of license and permit◦ Sale of government assets◦ Rental of government property◦ Fines◦ Return from government investment◦ Services that government offers

Non-Tax Revenues

The revenue that not accordance with any law

Consist mainly for ◦ Repayment and reimbursement

Refunds of overpayments in many years Repayment of loans from government agencies Payback salary

Non-Revenue Receipt

Falls into three structures◦ Proportional Tax◦ Progressive Tax◦ Regressive Tax

Types of Tax Structure

Is a tax which is imposed at the same rate for all income levels

The tax rate remains constant regardless of whether income increases or decreases

Proportional Tax

Income 500 1000 1500 2000 2500

Total taxes 25 50 75 100 125

Tax rate (total tax/income) 5% 5% 5% 5% 5%

Is a tax rate which goes on increasing in income

The higher the income, the higher the percentage of tax

Can be charged to obtain revenue to help the poor

Progressive Tax

Income 500 1000 1500 2000 2500

Total taxes 25 80 150 240 375

Tax Rate (total tax/income) 5% 8% 10% 12% 15%

Is a tax rate which falls with an increase in income

The higher the income, the lower the percentage rate

Regressive Tax

Income 500 1000 1500 2000 2500

Total taxes 50 80 90 80 50

Tax Rate (total tax/income) 10% 8% 6% 4% 2%

Also known as ‘Public Debt’ or ‘Public Borrowing’

Occurs when government revenue does not meet the government expenditure

Sources of public debt:◦ Internal sources◦ External sources

Government’s Borrowing

Citizens◦ Sale of securities, bonds and saving certificates

Financial Institutions◦ Insurance companies invest their resource in the

purchase of government securities Central Bank

◦ Purchase government securities, bonds, debentures from government

Commercial Banks◦ Invest their deposit in government bonds and

securities

Internal Sources of Borrowing

International money market◦ Foreign exchange banks, bonds and securities

Currency loans from foreign government

Loans from international financial institutions◦ International Monetary Fund (IMF) loans in short-

term◦ World Bank loans in long-term basis

External Sources of Borrowing

The one of main instrument in fiscal policy to increase aggregate demand

Can be classified as transfer of payment and purchases of goods and services

Falls into two categories:◦ Government Operating Expenditure◦ Government Development Expenditure

Government Expenditure

To cover the expenses of operating and administering government departments

Consists:◦ Emoluments◦ Pensions◦ Debt◦ Subsidies◦ Grants

Government Operating Expenditure

For investment purposes to improve facilities in the basic physical infrastructure

Focused on development projects to boost economic growth

Consists:◦ Defense and security◦ Economic / sector services◦ Social services◦ General administration

Government Development Expenditure

The use of government taxation and expenditure to influence the country’s spending, employment and price levels

Instruments of Fiscal Policy:◦ Discretionary Fiscal Policy◦ Automatic Fiscal Policy

Fiscal Policy

Can be conclude as below:

Discretionary Fiscal Policy

Discretionary Fiscal Policy

(Tax and Government Spending)

Contractionary Fiscal Policy

Expansionary Fiscal Policy

Also known as automatic stabilization Transfer of payment and income tax are

automatic stabilizer Changes in government expenditure

(transfer of payment) and taxes (income tax) which occur automatically without government intervention

Because they are change varies with business cycle

Automatic Fiscal Policy

Expansion ◦ Lower transfer of payment◦ Increase income tax

Recession◦ Increase transfer of payment◦ Lower the tax (resulted from drop in income

because income tax is progressive tax)

Automatic Fiscal Policy

Tax ◦ Income tax relief up to RM6,000 for EPF◦ Import duties and excise duty exemption for

hybrid cars extended until 31 December 2011◦ Import duty and sales tax exemption on

broadband equipment until 2011◦ Sales tax exemption on all types of mobile

phones◦ Service tax be increased from 5% to 6%◦ Government proposes abolition of import duty

on approximately 300 goods preferred by tourist and locals

Highlight Budget 2011

Operating Expenditure◦ The monthly allowance for KAFA teachers

increased to RM800

Highlight Budget 2011

Development expenditure

◦ To support tourism industry, government allocates RM100 million

◦ Allocation of RM146 mil to support oil, gas and energy industry

◦ In agriculture sector, government allocate RM3.8bil to increase productivity and higher returns

◦ The Northern Corridor Economic Region is allocated RM133mil

◦ RM6.4bil to build and upgrade schools, hostels, facilities and equipment

Highlight Budget 2011